Communists constructing capitalism: State, market, and the Party in China’s financial reform

COMMUNISTS CONSTRUCTING CAPITALISM

Series editors: Richard Madsen and Yangwen Zheng

This series provides a dedicated outlet for monographs and possibly edited volumes that take alternative views on contemporary or historical China; use alternative research methodologies to achieve unique outcomes; focus on otherwise understudied or marginalized aspects of China, Chineseness, or the Chinese state and the Chinese cultural diaspora; or generally attempt to unsettle the status quo in Chinese Studies, broadly construed. There has never been a better time to embark on such a series, as both China and the academic disciplines engaged in studying it seem ready for change.

Previously published

The advocacy trap Stephen Noakes

Communists constructing capitalism

State, market, and the Party in China’s financial reform

Julian Gruin

Manchester University Press

Copyright © Julian Gruin 2019

The right of Julian Gruin to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

Published by Manchester University Press

Altrincham Street, Manchester M1 7JA

www.manchesteruniversitypress.co.uk

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

ISBN 978 1 52613 532 2 hardback

ISBN 978 1 5261 3534 6 paperback

First published 2019

The publisher has no responsibility for the persistence or accuracy of URLs for any external or third-party internet websites referred to in this book and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

Typeset in Monotype Fournier by

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To my parents, Rick and Yeats Gruin

Contents

List of figures

List of tables

Series editors’ foreword

Preface

List of abbreviations

1State, market, and the Party in Chinese capitalism

2Ancient markets, modern capitalism: China and the problem of Eurocentrism

3CCP authority and the two faces of uncertainty

4From Tiananmen onwards: constructing capitalism in the 1990s

5Entering the world: consolidating capitalism in the 2000s

6Post-crisis challenges: confronting capitalism in the 2010s

7Chinese finance and the future of authoritarian capitalism

References

Index

Figures

4.1 Savings levels, 1978–96

5.1 Shares of investment, consumption, and exports in GDP, 1978–2012

5.2 Sources of funds for fixed-asset investment, 1978–2012

5.3 Exports and imports in GDP, 1978–2012

5.4 Real effective exchange rate and current account, 1994–2012

6.1 2010 and the emergence of shadow banking

6.2 Growth of select NBCI product categories, 2011–16

Tables

1.1 Perspectives on Chinese economic development

4.1 Assets, loans, and deposits, by financial institution in 1997

4.2 Long-term interest rates, 1994–95

5.1 Sources of funds for AMC purchase of NPLs, 1999

5.2 Equity structure of China’s largest banks, 2010

6.1 Stimulus package investment plan

7.1 Illustrative data sources for private and public financial credit scoring mechanisms

Series editors’ foreword

The study of China has in recent decades seen an explosion as many universities have begun to offer modules ranging from Chinese history, politics and sociology to urban, cultural, and Diaspora studies. This is welcome news; the field grows when the world is hungry for knowledge about China. Chinese studies as a result have moved further away from the interdisciplinary tradition of Sinology towards more discipline-based teaching and research. This is significant because it has helped integrate the once-marginalised Chinese subjects into firmly established academic disciplines; practitioners should learn and grow within their own fields. This has also, however, compartmentalised Chinese studies as China scholars communicate much less with each other than before since they now teach and research in different departments; the study of China has lost some of its exceptionalism and former sheen.

Alternative Sinology calls for a more nuanced way forward. China scholars can firmly ground themselves in their own perspective fields; they still have the advantage of Sinology, the more holistic approach. The combination of disciplinary and area studies can help us innovate and lead. Now is an exciting time to take the study of China to new heights as the country has seen unprecedented change and offers us both hindsight and new observations. Alternative Sinology challenges China scholars. It calls on them to think creatively and unsettle the status quo by using new and alternative materials and methods to dissect China. It encourages them to take on understudied and marginalised aspects of China at a time when the field is growing and expanding rapidly. The case of China can promote the field and strengthen the individual discipline as well.

Zheng Yangwen and Richard Madsen

Preface

On 8 November 2008 in the heart of Beijing’s ‘financial street’ [金融街], an executive at one of China’s ‘big five’ state-owned commercial banks (SOCBs) received a phone call from the head of one of the bank’s offices in a city in Shandong province. The provincial bank head had dined the night before with a local Party official, and one topic dominated discussion: how they could maintain confidence in the financial system, free up liquidity and investment capital, and stimulate domestic demand. Three days previously, the Central Committee of the Communist Party of China (CCP) had issued Document No. 18, laying out ten policies to ‘further expand domestic demand and assure stable rapid growth’ in the midst of global economic downturn, and cadres across the country were tripping over themselves to gear up plans and projects for investment (Liu Zebang 2008). One dilemma presented itself, however: since its establishment in 2003 the China Banking Regulatory Commission (CBRC) had also been leading the ‘modernization’ of China’s banking sector in macro-prudential regulation, corporate governance, and financial supervision, aspects of which were at risk of being ridden over roughshod in the frenetic drive to shore up growth. The Beijing executive’s opinion was clear: the Party centre was under no illusions as to the need for clear macroeconomic direction, and if those at lower levels started second-guessing, ‘no-one would know what to do and economic disorder would ensue’. Unity [团结] was the order of the day, and the CBRC would also do what the Party required of it.¹

When I sat down with this executive in late 2012, sipping green tea in a corner office, the financial crisis had brought Western economies to their knees, and the triumphalism that had accompanied China’s much-feted stimulus package and 8.7 per cent gross domestic product (GDP) growth in 2009 had begun to fade amidst growing awareness of wasteful investment projects, a further consolidation of economic power within the largest state-owned enterprises (SOEs), and a perception that ordinary households were amongst the last beneficiaries of the stimulus spending. We talked about this concept of economic disorder [jingji hunluan 经济混乱] – what it means, what causes it, and its implications. I asked about the lessons he drew from the 2008 financial crisis, and he said interesting but not entirely unexpected things about reducing inefficient state bureaucracy, about managing moral hazard, about limiting the innovation of complex financial products; but then he surprised me. He mentioned a different word for disorder [dongluan 动乱], and said that neither the state nor the market were capable of managing this kind of disorder. This is a political word, not an economic one, and it connotes turmoil, unrest, upheaval. As China was accelerating financial reform, as the ‘transformation of the state’ was gathering pace, the lesson that this banker took from the crisis was that it was neither the regulatory state nor the free market that prevented dongluan. It was the Party.

This vignette highlights three puzzling aspects of China’s reform-era trajectory of development: (1) the embrace of ‘the market’; (2) the rationalization of ‘the state’; and (3) the undisputed political-economic authority of the CCP. As Xi Jinping’s administration now confronts the mounting pressures of global economic turbulence and uncharted domestic economic terrain, important questions remain unanswered about how these features of China’s political economy are connected, and how they are likely to evolve in the years to come. Simplifying somewhat, the core argument I develop in this book is that to understand these trends we have to look beyond the concepts of the state and the market as we have understood them in the liberal tradition of political economy, and instead theorize the politico-economic agency of the CCP itself, and in particular the ideas and conceptions of order that underpin this agency. Such factors have been largely neglected in existing accounts of China’s financial development and reform, which remain focused on the more micro-level dynamics of political contestation within the state and market environments, without pausing to consider more broadly how these political and economic logics have interacted so as to produce a remarkably stable, if unbalanced and as yet potentially unsustainable, set of mechanisms for economic growth and the accumulation of capital. As I argue in this book, without accounting for the ideational cohesion that generated a powerful basis for CCP authority and control over the flow of capital throughout the economy, it becomes very difficult to understand both the resiliency of Party control and the commitment to market-based institutional reform. Although Chinese financial policymaking and development since the early 1990s has embodied a capitalist logic of economic growth and accumulation, the manifestation of this logic elides the traditional analytical dichotomy between the state and the market. Rather, this logic manifests in the CCP constituting the central feature of a system of socio-economic risk management that has functioned both to support economic growth, at the same time as a mechanism of political control. That is to say, the process of financial reform involved the construction of a system that would enable state-regulated and market-based economic growth at the same time as preserve CCP authority over the nature and structure of that growth.

The motivation for probing the sociological role of the CCP arose inductively from numerous discussions in the field amongst academics and bankers in Beijing, where it rapidly became apparent that in order to understand the role of the financial system in China, one must look beyond traditional notions of market liberalization and state regulation. In the wake of the 2008–09 crisis, it was an opportune time not just to consider how China’s development was affecting global finance, but perhaps more importantly, to reflect more deeply and critically upon some of the axiomatic assumptions that underpinned the development of Western finance. Interrogating these conceptual and theoretical underpinnings of Western political economy in turn would provoke a reassessment of how these intellectual lineages had informed – and indeed tainted – resulting perspectives on Chinese economic development. What I discovered during two years of residence and fieldwork in Beijing was not just that Chinese finance was subject to state intervention, the politics of which obstructed market liberalization. Rather, my findings would reveal that the Chinese path of financial development was the product of an understanding of the relationship between market competition, bureaucratic regulation, and political authority that was fundamentally different to that which had led Western economies to financial near-meltdown. This itself was no normative judgement – China’s financial capitalism is unsustainable and crisis-prone just like any other – however it raised important questions for how we understand contemporary capitalism in comparative context. In contrast to a complex intertwining of socio-political rights with both the redistributive and regulative function of the state as well as the liberating competition of the market mechanism, Chinese political economy embodied such rights in the relationship between society and the CCP itself, whilst the social institutions enabling state regulation and market competition constituted tools – to be directed and shaped towards political ends but which give rise to little normative authority themselves. From this perspective, Xi Jinping’s consolidation of the CCP’s ideological and organizational authority is far from a rupture with the course of reform and opening but rather marks a deepening of a political tradition deeply embedded in Chinese history and society. It represents a determined effort to construct a viable authoritarian capitalism – one that harnesses the power of both state and market in pursuit of the deeper political objectives of CCP-led socio-economic development and national rejuvenation.

The majority of the book was then written in Oxford under the astute guidance of Andrew Hurrell, whose advice and support throughout was invaluable in establishing the core intellectual concerns and tone of the project. At Oxford, I was the beneficiary of a deep and diverse intellectual community stretching across the fields of international relations and Chinese Studies. In particular Shaun Breslin, Sarah Eaton, Kalypso Nicolaïdis, and Eric Thun provided insightful and invaluable feedback at various stages, improving the final manuscript considerably. St Antony’s College itself was not just a vibrant and multi-faceted hub of intellectual activity that I was fortunate to be a member of, but also provided financial support via the Wai Seng Senior Research Scholarship in Asia-Pacific Studies for which I am particularly indebted. Beyond St Antony’s I have received financial support from many sources, but in particular I am also extremely grateful to the Chiang Ching-Kuo Foundation for funding the latter stages of the project, to the University of California at Berkeley for funding language studies in Beijing at the Inter-University Program for Chinese Studies, and to the Department of Politics and International Relations for funding fieldwork throughout the project. The receipt of a Future Research Leaders Fellowship from the UK Economic and Social Research Council (ES/N001982/1) also made further research and revisions possible on the manuscript.

Beyond Oxford, a number of institutions and individuals were instrumental in enabling the course of research. My discussions and seminars in Cologne whilst visiting the Max Planck Institute for the Study of Societies were particularly valuable in establishing the theoretical parameters of the project and opening up new lines of inquiry to me, and I would like to thank the staff and researchers at the institute not only for their financial support, but also for making my time in Cologne such an enjoyable one. In the course of revisions, I benefited considerably from the manuscript development sessions held at the University of Warwick, and the valuable feedback and support provided by those attending. It has also been a pleasure to work with Manchester University Press, and I am particularly grateful also to the two reviewers whose comments on the text helped improve it considerably. Since I began working on this project, a number of scholars and practitioners have generously shared their insights, networks, and suggestions with me. Amongst others still, Jamil Anderlini, Bilal Baloch, Quentin Bruneau, Tobias ten Brink, Greg Chin, Martin Chorzempa, Jerry Cohen, Rogier Creemers, Claire Du, Matt Ferchen, Rosemary Foot, Thomas Gold, Sandra Heep, Sebastian Heilmann, Huang Wei, Scott Kennedy, Chris Kutarna, Wendy Leutert, Tracy Li, Vic Li, LJ Liu, Kun-Chin Lin, Anton Malkin, Christopher McNally, Miguel Otero-Iglesias, Lou Pauly, Simon Rabinovitch, Chris Sampson, Henry Sanderson, Vivienne Shue, Wolfgang Streeck, Marc Szepan, Carl Walter, Ann Wang, Logan Wright, Wang Jue, Wang Yingyao, Wang Yong, Xiao Geng, Xu Jiajun, Xu Qiyuan, and Lea Yu all did their part in shaping the course of the research.

My lengthy stint of fieldwork in China was possible only with the help of a number of people. Zhu Tianbiao at the Peking University School of Government and Gao Haihong and Zhang Ming at the Chinese Academy of Social Sciences all provided invaluable institutional support and intellectual guidance, and their efforts were complemented by many others at both institutions. This extends especially to all those within the various institutions and organizations of China’s financial ecosystem who shared their time, opinions, and hospitality with me during those months of talking, not just in airless meeting rooms but also over tennis, hotpot, or baijiu, sometimes all three. Some I now count as friends as well as spirited interlocutors, but to all of them I can only say that this research would not have been possible without you, and I want to express my heartfelt gratitude. My teachers at the Inter-University Program at Tsinghua University were all wonderful, especially 许老师 who was an endless source of motivation and support. The inestimable Peter Knaack also arrived in my life at this time as both a wonderful friend and inspiring colleague. My Beijing existence proved full of surprises, and Kirie Stromberg and Rosalyn Shih were especially treasured companions along this path. I’m grateful to them and many other friends for making my life in Beijing the enriching experience that it was.

Finally, I thank my family – Rick, Yeats, and Adrian – for shaping, supporting, and surviving my intellectual career in too many ways to describe with any eloquence here. Above all, they encouraged me always to follow my own path and provided the love and support with which I was able to do this. Despite the distances across which the Gruins are now dispersed around the world, they are always close to my heart.

Note

1Interview 14 December 2012, Beijing – Bank of China.

Abbreviations

1

State, market, and the Party in Chinese capitalism

Whether a little more plan, or a little more market; this is not the fundamental difference between socialism and capitalism. The plan and the market are both economic tools.

Deng Xiaoping (1993)¹

The Party is everywhere, in all institutions, and [with] influence over all people. But the way it works is invisible, like in that American movie Fight Club. The first rule is that you don’t talk about it.

Beijing investment banker²

Since Deng spoke at the outset of the reform era of the construction of ‘real’ banks (Han 1995), the ongoing reform of the financial sector has left it unclear to many – observers and participants alike – exactly what this role is and what it should be. Nevertheless, the CCP’s pursuit of an increasingly efficient economy whilst guarding against any political risk has been premised upon its capacity to retain control over the flow of capital and the related preservation of monetary and fiscal autonomy. In this way, the course of market-oriented economic reform, even as it has redefined the relative role of the state, has simultaneously intensified the political-economic importance of the CCP. Out of an analysis of how the financial system has been deployed by the CCP since the conception of the socialist market economy following the 1989 Tiananmen Square protests, this book sheds light on how the CCP has constructed capitalism. This is a capitalism that has not only reshaped but itself has also adapted to the social structures of contemporary China, and in ways that now defy the traditional analytic categories of Western political economy.

I examine how this process of ‘communists constructing capitalism’ has been underpinned by historically distinctive cognitive frames concerning the relationship between financial capital and socio-political authority. These frames are a product of deeply embedded social norms and structures coalescing with the opportunities and constraints – both discursive and material – generated through China’s interaction with the global political economy. Accordingly, the financial system has continuously occupied a unique position at the centre of the broader political economy. Through analysis of the path of financial reform since the early 1990s, I trace the implications of the duality of the role that it fulfilled under the aegis of CCP control, firstly as an economically effective mechanism for financial intermediation within the real economy, and secondly as a politically effective mechanism for preserving centralized power and authority over the benefits of that financial intermediation. The institutional and regulatory reforms that took place during the 1990s and 2000s do not overshadow the continuity of this function. Indeed, as will be discussed in later chapters, those reforms were in many ways structured specifically around the need to preserve the integrity of this duality.

The development of the banking system is less a story of obstructed or stalled reform, but more one of a commitment to pressing against the limits of the growth model and engaging in a form of brinksmanship with the financial crisis in an effort to secure enough material wealth in order to ameliorate the effects of capitalist accumulation. This effort to ‘buy time’ through accumulation, and to ‘do enough’ to address social conflict and preserve social stability, is what distinguishes the modern epoch of capitalist accumulation from either a traditional conception of free market laissez-faire capitalism or of the true ideal of the developmental state. This was the guiding principle that has accompanied reform since the early 1990s, and it can still be witnessed today as the CCP continues to actively engineer the process of development in a way that ameliorates the worst excesses of capitalist growth. More broadly, it serves ultimately as a demonstration of just how antithetical capitalism is to democracy. The role of the CCP in constructing an authoritarian capitalist society illuminates not just how the development of capitalism has affected China, but how China affects our conceptions of capitalism.

These arguments engage two long-standing conceptual fractures in contemporary political economy. The first concerns the relationship between the domestic (or the local) and its relationship to the international (or the global), the second that between the political logics of the state and the economic logics of the market. How the political problem is resolved in China via the economic, and moreover how the economic solution is in turn underpinned by the political, is one of the most central and intriguing aspects of China’s path to reform and opening.³ This process is in turn connected intimately to the evolution of the global political economy, as capitalist development has come to form the central objective of reform-era Chinese society. Recognizing the extent of the interpenetration of the political and the economic transforms the question of how China ‘became’ capitalist. Rather than one of the waxing and waning of state economic power and the political agency of private economic actors as China embarked on a new era of development, it becomes one of how structurally entrenched imperatives – both domestic and international – are constraining certain individuals, networks, and institutions whilst generating political resources for others, within an increasingly interdependent global system.

The book therefore addresses these fractures between the universal and the local, and the political and the economic, by approaching the ‘China question’ from an alternative perspective – one that de-emphasizes the state versus market dichotomy and instead focuses on the socio-economic foundations of power and authority that manifest through the financial system. At the core of a global political economy that has given rise to these analytical fractures reside multiple systems for mediating the flow of capital and resources necessary for modern economic activity and production. Finance – and more specifically financial capital – penetrates the political realm as well as the economic, whilst also forming a critical set of linkages between the domestic and the international within the global political economy. This leads to the question of finance and its duality of purpose – as a system of financial intermediation as well as political control. It further points towards how the role of China’s financial system is crucial in China’s emergence into the global political economy as breaking down barriers between not only the political and the economic, but also between the local and the universal. This book speaks not only to the study of China’s political economy and the theoretical and conceptual debates that surround this endeavour, but also to more fundamental questions concerning how the universal coalesces with the local at the point of what remains fundamentally but not exclusively the international.

In this manner the book seeks to answer Kellee Tsai’s call for scholarship to better ‘show what China can do for political science, both empirically and analytically’ (Tsai 2013, 860). It does so in three related ways. First, it provides an insight into the nature of China’s socialist market economy, probing China’s development as a resiliently non-liberalized political economy that underpinned stable, rapid, and yet unsustainable economic growth. This is an empirical paradox that has not yet been adequately addressed, and I place the role of the CCP at the heart of this examination. The role of the financial system in China’s development has, as for all other financial systems in the world, been underpinned by a set of ideas and institutions that enable socio-political uncertainty to be evaluated, financial risk to be managed, and economic activity to be undertaken. The book shows how this process in China has revolved, not around an equilibrium reached between state regulation and market freedom, but around the role of the CCP as the primary source of confidence and faith in financial stability and economic growth.

This gives rise to the book’s second objective, which is to explore how such a perspective overcomes some of the limitations of studying the political economy of financial capitalism that arise through a focus upon the distinct institutional categories of the state and the market. The role of the CCP as conceptualized in this book illustrates the difficulties of relying upon these categories to understand the intersection of universal logics of economic development and the particular social institutions through which these logics manifest. The study represents an attempt to overcome these conceptual limitations and provide a means of grappling with the empirical problem of explaining paradoxical trends in China’s politico-economic development at the same time as generating insight into what China’s post-1989 financial development can tell us about the nature of contemporary political economy as contemporary capitalist political economy.

The third objective of the book is accordingly to place these investigations in the